Abrams v. Intuitive Surgical, Inc. et al

Filing 237

ORDER denying 215 Motion to Dismiss Second Amended Complaint; denying 227 Motion for Reconsideration. Signed by Judge Edward J. Davila on 09/29/2017. (ejdlc3S, COURT STAFF) (Filed on 9/29/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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IN RE INTUITIVE SURGICAL
SECURITIES LITIGATION

Case No. 5:13-cv-01920-EJD

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ORDER DENYING DEFENDANTS'
MOTION TO DISMISS SECOND
AMENDED CLASS ACTION
COMPLAINT; DENYING PLAINTIFFS’
MOTION FOR RECONSIDERATION
RE CLASS CERTIFICATION

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United States District Court
Northern District of California

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Re: Dkt. No. 215, 227
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I. INTRODUCTION
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This is a securities fraud class action suit. Presently before the Court is Defendants’
motion to dismiss the Second Amended Complaint (“SAC”). The Court finds it appropriate to

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take the motion under submission for decision without oral argument pursuant to Civil Local Rule
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7-1(b). Based upon all pleadings filed to date, the Court DENIES Defendants’ motion.

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II. BACKGROUND
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Intuitive Surgical, Inc. (“Intuitive”) is a biomedical corporation that designs, manufactures,
and sells da Vinci Surgical Systems (“da Vinci”), its sole product and primary source of revenue.

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Da Vinci is a robotic surgery system consisting of three or four robotic arms, depending on the
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model, which performs laparoscopic surgeries through tiny incisions. Surgeons sitting at a
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console away from the patient are able to look through a viewfinder and use two joystick-like
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gadgets to control the robotic arms to perform surgery. Plaintiffs purchased or otherwise acquired
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CASE NO.: 5:13-CV-01920-EJD
ORDER DENYING DEFENDANTS' MOTION TO DISMISS SECOND AMENDED CLASS
ACTION COMPLAINT
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Intuitive stock during the period between February 6, 2012 and July 18, 2013 (the “Class Period”).

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Plaintiffs allege that during the Class Period, Defendants made untrue statements of material fact

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and/or omitted to state material facts necessary to make the statements not misleading regarding

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the safety of da Vinci.

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In August of 2014, the Court upheld the sufficiency of Plaintiffs’ falsity and scienter

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allegations in the Amended Complaint. Defendants filed an answer and a motion for

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reconsideration, which the Court denied. In doing so, the Court reaffirmed its previous ruling that

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Plaintiffs had adequately alleged actionable false or misleading statements regarding da Vinci’s

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safety and scienter. Approximately two years later, Plaintiffs sought leave to amend their
complaint to conform the pleading to the evidence gathered during discovery and to remove

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allegations attributed to a confidential witness after the witness denied making the statements.

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Defendants moved to strike the Amended Complaint. The Court granted the motion to amend and

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denied the motion to strike.

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Despite the Court’s previous rulings affirming the sufficiency of Plaintiffs’ allegations at

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the pleading stage, Defendants move to dismiss the SAC, contending once again that Plaintiffs

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have failed to plead actionable misstatements or omissions, and have failed to allege scienter.

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Defendants’ motion is predicated primarily upon the Supreme Court’s opinion in Omnicare, Inc.

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v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015).

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III. STANDARDS

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Federal Rule of Civil Procedure 8 requires that a complaint contain a short and plain

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statement showing the pleader is entitled to relief. A motion to dismiss under Rule 12(b)(6),

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Fed.R.Civ.P., “tests the legal sufficiency” of the complaint. Navarro v. Block, 250 F.3d 729, 732

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(9th Cir. 2001). A court may dismiss a claim for “lack of a cognizable legal theory or the absence

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of sufficient facts alleged under a cognizable theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d

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696, 699 (9th Cir. 1988). In reviewing the sufficiency of a claim, the court accepts as true all of

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the plaintiff’s allegations and construes them in the light most favorable to the plaintiff. In re

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CASE NO.: 5:13-CV-01920-EJD
ORDER DENYING DEFENDANTS' MOTION TO DISMISS SECOND AMENDED CLASS
ACTION COMPLAINT

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Gilead Sciences Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

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Fraud cases are also governed by the heightened pleading standard of Rule 9(b),

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Fed.R.Civ.P. A plaintiff averring fraud must plead with particularity the circumstances

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constituting fraud. Fed.R.Civ.P. 9(b). Securities fraud claims must also satisfy the pleading

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requirements of the Private Securities Litigation Reform Act (“PSLRA”), which states that the

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complaint “shall specify each statement alleged to have been misleading, the reason or reasons

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why the statement is misleading, and, if an allegation regarding the statement or omission is made

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on information and belief, the complaint shall state with particularity all facts on which that belief

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is formed.” 15 U.S.C. § 78u–4(b)(1). The PSLRA also requires a plaintiff to state with
particularity facts giving rise to a strong inference of a defendant’s scienter. See 15 U.S.C. §78u-

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4(b)(2).

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IV. DISCUSSION
A. The Alleged Misstatements or Omissions
Defendants contend that the statements at issue must be dismissed because they are not

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“misleading as to a material fact.” Basic v. Levinson, 485 U.S. 224, 238 (1988). In Omnicare, the

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Supreme Court instructed that opinion statements can serve as the basis of a securities fraud claim

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under two circumstances. The first is when the speaker did not “actually hold the stated belief.”

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Omnicare, 135 S.Ct. at 1326. Thus, for example, an opinion statement such as, “I believe our TVs

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have the highest resolution available on the market” would be an actionable false statement if the

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speaker knew that the company’s TV only placed second (assuming the misrepresentation were

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material). Id. The second is when the opinion statement omitted a material fact that rendered it

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“misleading to an ordinary investor,” even if it was “literally accurate.” Id. 1327-28. Thus, for

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example, an opinion statement such as, “[w]e believe our conduct is unlawful,” could be

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misleadingly incomplete if the speaker made the statement without having consulted a lawyer. Id.

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at 1328. The Court reasoned, “[i]n the context of the securities market, an investor, though

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recognizing that legal opinions can prove wrong in the end, still likely expects such an assertion to

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rest on some meaningful legal inquiry –rather than, say, on mere intuition, however sincere.

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Similarly, if the issuer made the statement in the face of its lawyers’ contrary advice, or with

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knowledge that the Federal Government was taking the opposite view, the investor again has

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cause to complain: He expects not just that the issuer believes the opinion (however irrationally),

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but that it fairly aligns with the material facts about the issuer’s inquiry into or knowledge

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concerning a statement of opinion.” Id. at 1328-1329. Therefore, to plead fraud based on an

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opinion statement under an omissions theory, a plaintiff must “identify particular (and material)

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facts going to the basis for the issuer’s opinion – facts about the inquiry the issuer did or did not

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conduct or the knowledge it did or did not have – whose omission makes the opinion statement at

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issue misleading to a reasonable person reading the statement fairly and in context.” Id. at 1332.

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This Court has already ruled that the alleged statements of opinion in the Amended

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Complaint are sufficiently pled. The SAC is based on the very same alleged statements of

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opinions. Upon reexamination of the alleged statements with the benefit of the Omnicare

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decision, the Court reaffirms its prior determination that Plaintiffs’ allegations are sufficient at the

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pleading stage. Plaintiffs’ allegations fall within the second category of Omnicare statements of

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opinion, namely those that allegedly omit material facts that render the statements misleading to

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an ordinary investor. In the SAC, Plaintiffs allege that Defendants made several positive opinion

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statements regarding da Vinci’s safety and efficacy: “[w]e believe that it combines the benefits of

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minimally invasive surgery (MIS) for patients with the ease of use, precision, and dexterity of

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open surgery”; “[w]e believe that da Vinci continues to be a safe and effective surgical method”;

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“[d]espite a concerted effort by vocal critics of robotic surgery, support remains strong among

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patients, surgeons and hospitals . . . . da Vinci has clinically proven benefits in offering a

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minimally invasive option to a broader group of patients than traditional technologies”; and da

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Vinci “has proven safety, efficacy, economic and ergonomic benefits when compared to open

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surgical procedures it is replacing.” SAC, ¶¶224, 227, 241, 242, 245(a), 245(b).

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Plaintiffs allege that the opinion statements regarding da Vinci’s safety and efficacy were
CASE NO.: 5:13-CV-01920-EJD
ORDER DENYING DEFENDANTS' MOTION TO DISMISS SECOND AMENDED CLASS
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misleading because they omitted numerous material facts. Among other things, Plaintiffs allege

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that Defendants misclassified numerous adverse event reports of serious injury under the “other”

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category instead of in the “serious injury” category and categorically suppressed thousands of

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medical device reports (“MDRs”) by failing to report them to the FDA database. It is plausible

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that a reasonable investor would find that the existence and misclassification of the MDRs

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constitute material information. Further, it is plausible that a reasonable investor would find that

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the statements of opinion regarding da Vinci’s safety and efficacy did not “fairly align[]” with the

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unreported and misclassified MDRs.

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Plaintiffs also allege that Defendants failed to disclose the existence or the nature of the
corrective letters sent out to hospitals in October of 2011 regarding a tip cover defect that caused

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serious injuries. Further, Plaintiffs allege that Defendants failed to disclose specific information

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about the number and nature of product liability suits Intuitive faced during the Class Period. It is

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plausible that a reasonable investor would find information about the corrective letters and product

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liability suits material. In addition and contrary to Defendants’ assertions, it is entirely plausible

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that a reasonable investor would find the information about corrective letters and product liability

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suits rendered a statement like, “[w]e believe that DaVinci continues to be a safe and effective

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surgical method” materially misleading.

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Citing to In re Rigel Pharmaceuticals, Inc. v. Securities Litigation, 697 F.3d 869 (9th Cir.

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2012), Defendants argue that they were not required to disclose all material information regarding

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safety. Defendants are correct. The Rigel court also stated, however that the defendant in that case

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was not required to disclose all material information regarding safety “as long as the omissions do

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not make the actual statements misleading.” Id. at 880 n.8. For the reasons already discussed

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above, it is plausible that a reasonable investor would find that the omitted information regarding

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MDRs, corrective letters and product liability suits, rendered the statements of opinion misleading.

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Defendants next contend that the alleged statements of opinion are not misleading when

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placed in a “broader frame” that includes several other public statements Intuitive made warning

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shareholders that patient injuries, or even deaths, are inherent to the medical device industry; that

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Intuitive’s business could be affected if DaVinci were to cause injury or death; and that defects in

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the design or manufacture of our products might necessitate a product recall. At the pleading

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stage, however, the allegations in the complaint are accepted as true and all reasonable inferences

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are drawn in Plaintiffs’ favor. See In re Tesla Motors, Inc. Sec. Litig., 75 F.Supp.3d 1034 (N.D.

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Cal. 2014) (citing Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Applying

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these standards, the Court finds Plaintiffs’ allegations of materially misleading statements of

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opinion are adequately pled.

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B. Allegations of Scienter

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Defendants contend that the SAC must be dismissed because Plaintiffs have failed to plead

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facts giving rise to a strong inference of scienter. This Court has already determined that

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Plaintiffs’ allegations of scienter in the Amended Complaint are sufficient, and Plaintiffs contend

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that the SAC allegations are even stronger because the SAC now incorporates evidence developed

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through discovery that shows Defendants knew about the safety problems affecting da Vinci and

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intentionally or reckless concealed them from investors.

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The PSLRA requires a plaintiff to “state with particularity facts giving rise to a strong

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inference that the defendant acted with the required statement of mind.” 15 U.S.C. §78u-4(b)(2).

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“A defendant is liable under Section 10(b) and Rule 10b-5 when he acts with scienter, a ‘mental

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state that not only covers intent to deceive, manipulate, or defraud, but also deliberate

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recklessness.’” City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align

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Tech., 856 F.3d 605, 619 (9th Cir. 2017) (quoting Schueneman v. Arena Pharm., Inc., 840 F.3d

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698, 705 (9th Cir. 2016). “Deliberate recklessness is ‘an extreme departure from the standards of

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ordinary care . . . which presents a danger of misleading buyers or sellers that is either known to

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the defendant or is so obvious that the actor must have been aware of it.’” Schueneman, 840 F.3d

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at 705 (italics in original). In ruling on a motion to dismiss, the inquiry is “whether all of the facts

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alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual

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allegation, scrutinized in isolation, meets that standard.” Tellabs, Inc. v. Makor Issues & Rights,

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Ltd., 551 U.S. 308, 310 (2007) (italics in original). “A securities fraud complaint will survive a

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motion to dismiss under Rule 12(b)(6) ‘if a reasonable person would deem the inference of

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scienter cogent and at least as compelling as any opposing inference one could draw from the facts

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alleged.’” New Mexico State Investment Council v. Ernst & Young LLPU, 641 F.3d 1089, 1095

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(9th Cir. 2012) (quoting Tellabs, 551 U.S. at 324).

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Applying the standards above, the Court finds that the SAC contains sufficient allegations,
which when taken collectively, give rise to a strong inference of scienter. Plaintiffs allege that

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Defendants, particularly Smith and Guthart, received communications with the FDA regarding

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injuries resulting from the da Vinci Tip Cover. SAC, ¶¶188-189. Plaintiffs allege that all of the

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individual Defendants regularly attended internal meetings and received reports apprising them of

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problems with the Tip Cover and the rise in MDRs and adverse events. Id. at ¶¶199-207.

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Plaintiffs specifically allege that Defendants Guthart and Mohr attended quarterly QRB meetings

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during which they were updated on: (1) five separate internal inquiries relating to arcing, the

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failure to report MDRs, and Intuitive’s noncompliance with FDA regulations; (2) procedure

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counts including converted and aborted procedures; (3) total complaints, reportable events, arcing

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events, and related injuries; (4) the number of regulatory requests for additional information

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related to arcing through the Tip Cover; (5) the number of Return Material Authorizations related

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to arcing through the Tip Cover; (6) product quality issues facing the Company; and (7) the status

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of internal and external audits and findings that identified major deficiencies in Intuitive’s quality

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management system. Plaintiffs also rely on public documents filed in a derivative action to

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establish the Board’s knowledge of and involvement with the Tip Cover and MDR reporting

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issues, and Defendants’ intentional or reckless failure to disclose problems with the Tip Cover and

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MDR reporting.

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Plaintiffs’ allegations regarding the individual Defendants’ stock sales during the Class

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Period, taken collectively with the allegations summarized above, also support a strong inference

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of scienter for the reasons previously stated in the Court’s Order Granting in Part and Denying in

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Part Defendants’ Motion to Dismiss the Amended Complaint. The SAC provides more detail

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regarding stock sales than the Amended Complaint, specifically with respect to the individual

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Defendants 10b-5 trading plans. In short, Plaintiffs allege that the individual Defendants

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terminated and manipulated their 10b-5 plans during the Class Period. SAC at ¶¶177-87. Further,

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Plaintiffs allege that Defendant Smith’s sales during the Class Period totaled $100,068,631, which

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represented approximately 40% of the total share he had available for sale during the Class Period.

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SAC at ¶162. Defendant Mohr sold 27,400 shares during the Class Period, which represented

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approximately 16 times his average shareholdings, and resulted in proceeds of $15,274,248. Id.
Defendant Guthart’s sales during the Class Period totaled $8,743,264, which represented

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approximately 30% of the total shares he had available for sale during the Class Period.

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The SAC also includes allegations that the individual Defendants authorized Intuitive to

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enter into hundreds of tolling agreements with individuals who had been injured allegedly by da

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Vinci. SAC at ¶211. More specifically, Plaintiffs allege that two of Intuitive’s insurance carriers

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filed suit seeking rescission of their insurance policies based on Intuitive’s concealment of the

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tolling agreements. The number of tolling claims allegedly reached 2,248 by June of 2013. Id.

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The tolling agreements, as well as the allegations regarding corrective letters sent to hospitals and

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the underreported and mislabeled MDR complaints, support a cogent and compelling inference

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that the individual Defendants actively concealed material information that did not align with the

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public statements made regarding the safety and efficacy of da Vinci.

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Defendants nevertheless contend that Plaintiffs’ allegations of scienter are insufficient

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because there are “plausible, nonculpable explanations” for Defendants’ conduct. Tellabs, 551

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U.S. at 324. Defendants contend that the obvious, nonculpable explanation for Defendants’

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statements is that Defendants honestly believed in their opinion that the da Vinci was safe and

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effective. The Supreme Court in Omnicare, however, rejected this argument. In Omnicare, the

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defendant argued that “as long as an opinion is sincerely held. . . it cannot mislead as to any

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matter, regardless what related facts the speaker has omitted.” Omnicare, 135 S.Ct. at 1328.

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Although finding more than a “kernel of truth” in Omnicore’s argument, the Court ultimately

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concluded that “literal accuracy is not enough: An issuer must as well desist from misleading

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investors by saying one thing and holding back another.” Id. at 1330. In this case, Plaintiffs have

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alleged that Defendants said “one thing” regarding the safety and efficacy of da Vinci, and “held

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back” several “particular and material facts going to the basis” of Defendants’ opinion statements,

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whose omission makes the opinion statements misleading to a reasonable investor.
V. CONCLUSION

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For the reasons set forth above, Defendants’ motion to dismiss the Second Amended
Complaint is DENIED. Pursuant to the parties’ Stipulation and Order Regarding the Case

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Schedule, the parties shall file a new proposed case schedule (or competing schedules, if the

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parties cannot agree), no later than October 15, 2017.

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Finally, Plaintiffs’ motion for reconsideration of the Court’s order regarding class
certification is DENIED.
IT IS SO ORDERED.
Dated: September 29, 2017
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EDWARD J. DAVILA
United States District Judge

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CASE NO.: 5:13-CV-01920-EJD
ORDER DENYING DEFENDANTS' MOTION TO DISMISS SECOND AMENDED CLASS
ACTION COMPLAINT
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